Why The S&P Just Hit A Record High — Despite Soaring Yields

SUMMARY

Ed Elson hosts a discussion with John Mowrey, Chief Investment Officer at NFJ Investment Group, and Robert Armstrong, Financial Times commentator, to analyze the S&P 500’s record performance despite high bond yields and to examine the state of the U.S. housing market. The episode also covers the implications of the Paramount and Warner Bros. Discovery merger, highlighting trends in media ownership and wealth concentration.

MAIN POINTS

• The S&P 500 reaches a record high despite 10-year Treasury yields exceeding 5% and oil prices above $100 per barrel. [1:30]
• Discussion centers on whether the market rally is broad-based or narrowly driven by large tech stocks, with small and mid-cap performance analyzed. [6:00]
• Concerns are raised about circular financing in the tech sector and the sustainability of earnings growth tied to AI-related capital expenditures. [11:01]
• Robert Armstrong explains how low-rate mortgages from the 2010s have frozen the housing market, reducing liquidity and limiting opportunities for new buyers. [18:02]
• The traditional role of housing as a key driver of the business cycle is questioned, with AI investment now providing significant economic stimulus. [24:01]
• Legislative efforts to ease zoning restrictions are discussed as a potential solution to the persistent housing supply shortage. [27:01]
• Paramount’s $11 billion acquisition of Warner Bros. Discovery is detailed, with financing involving Larry Ellison, Gulf sovereign wealth funds, and significant debt. [33:02]
• The episode concludes by highlighting the growing trend of inherited wealth and power in American media and business, exemplified by the Ellison family and other media dynasties. [36:00]

DETAILED ANALYSIS

The episode opens with a focus on the apparent contradiction in financial markets: the S&P 500 has reached a record high even as 10-year Treasury yields have climbed above 5%, a level not seen in over two decades, and oil prices have surged past $100 per barrel. Historically, such high yields and energy costs would be expected to suppress equity valuations, yet the market has demonstrated notable resilience. John Mowrey attributes this strength primarily to robust forward earnings growth in the S&P 500, which is approaching 38%—a rate typically observed only in the aftermath of major recessions, such as those following the 2008 financial crisis and the COVID-19 downturn.

Despite record index levels, the market’s price-to-earnings ratio has actually declined, with the S&P 500 trading at about 19 times forward earnings, below its five-year average. This suggests that while valuations have compressed in response to higher rates, earnings growth has more than compensated, keeping equities attractive.

A key theme is the breadth of the market rally. While some commentators argue that gains are narrowly concentrated among a handful of large technology firms, Mowrey counters that small and mid-cap stocks have also posted double-digit gains year-to-date. However, he acknowledges that in recent months, performance has become more top-heavy, with more than half of S&P 500 constituents in a bear market since August.

This divergence is explained by the disproportionate impact of rising oil prices and interest rates on smaller companies, which typically have higher debt loads and greater sensitivity to capital costs. Large technology firms like Apple, Nvidia, and Microsoft are less affected by these macroeconomic pressures, allowing them to continue driving index gains.

The discussion then shifts to the sustainability of current earnings, particularly in the technology sector. There is concern about the phenomenon of circular financing, where large tech companies—often referred to as hyperscalers—reinvest revenues within their own ecosystem, potentially inflating earnings figures. Mowrey points to examples such as Amazon’s investment in Anthropic, which in turn purchases Amazon’s chips, as evidence of this dynamic.

While acknowledging the need for independent demand to validate these earnings, he maintains that some level of circularity is inevitable given the scale of these enterprises. The durability of the AI-driven capital expenditure cycle is seen as crucial; if anticipated returns on AI investments do not materialize, a sharp reduction in spending could undermine future earnings growth. Nonetheless, current market pricing appears to partially, but not fully, reflect these risks, with the potential for further upside if inflation moderates and interest rates decline.

Attention then turns to the U.S. housing market, where Robert Armstrong provides insight into the effects of the prolonged low-interest-rate era. Millions of Americans, including Armstrong himself, secured 30-year fixed-rate mortgages at historically low rates during the 2010s and early 2020s. With mortgage rates now above 7%, these homeowners are disincentivized from moving, leading to a freeze in housing market liquidity.

This phenomenon is unique to the U.S. due to government-subsidized long-term fixed-rate mortgages, which are bundled and sold with implicit federal backing. The result is a market where transaction volumes have plummeted to levels last seen after the 2008 housing crisis, but prices remain elevated due to limited supply and sellers’ reluctance to accept losses. Young and first-time buyers are particularly disadvantaged, as high prices and scarce inventory make homeownership increasingly unattainable.

Armstrong further notes that housing, traditionally a major driver of the business cycle, has ceased to play that role in the current environment. The sector’s stagnation has reduced its contribution to GDP, but this has been offset by the surge in AI-related investment, which now provides much of the incremental stimulus to the economy. Legislative efforts to address the housing supply shortage, such as recent bipartisan measures to incentivize localities to relax zoning regulations, are highlighted as potential long-term solutions.

However, Armstrong cautions that significant price declines are unlikely; instead, real home prices may gradually adjust through inflation rather than nominal drops.

The episode concludes with an analysis of the Paramount and Warner Bros. Discovery merger, a landmark $11 billion deal financed by Larry Ellison, Gulf sovereign wealth funds, and substantial debt, resulting in a junk credit rating for the combined entity. David Ellison, son of Larry Ellison, now controls a vast array of American media assets, from major studios to iconic franchises.

This consolidation exemplifies a broader trend of inherited wealth and power, as many leading media companies are now run by the descendants of their founders. The discussion raises concerns about the implications of this “inheritocracy” for media diversity, economic mobility, and the concentration of influence in American society.

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